Reverse Mortgage Line of Credit is ‘Best Bet’ for Retirement Planning

As the reverse mortgage industry continues to grapple with the “loan of last resort” reputation, the line of credit feature may be the product’s best bet in becoming a serious retirement planning tool in the eyes of retirees and the financial professionals working with them.

Notable changes to the Home Equity Conversion Mortgage (HECM) program, including the Financial Assessment, have arguably made reverse mortgages more sustainable products for borrowers, their non-borrowing spouses and the Federal Housing Administration.

In turn, this has fostered a big push to increase exposure of the reverse mortgage product to the untapped market opportunity of qualified borrowers who would benefit from a HECM. Perhaps even more top-of-mind has been the push to reach financial advisors and educate them on how a reverse mortgage could be a viable supplement to their clients’ retirement portfolio.

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But while more education still needs to be done to raise awareness of using reverse mortgages in modern-day retirement planning, the line of credit feature could be the ticket to helping the HECM ditch that “loan of last resort” reputation once and for all.

“If you are talking about planning, then yes, that has to be the focus,” says Dr. David Johnson, associate professor of finance in the John E. Simon School of Business at Maryville University in St. Louis.

A standby reverse mortgage line of credit can offer borrowers—those who are planning for the long-run and not seeking a last resort—peace of mind in knowing that they will have funds, which grow over time that they can access for a number of reasons, be it to pay for unexpected health emergencies, supplement income or delay drawing Social Security benefits

“Clearly, there are so many different ways you can use that line of credit,” he says. “I’m confident that if you do a reverse mortgage and have a line of credit—whether you access it or not—it still changes people’s minds and gives them peace of mind knowing they have money that they can access in a short period of time if they need to,” Johnson says.

There are so many different ways to use a line of credit, Johnson said during a recent appearance on Savvy Senior Resources…Talking With Experts, a local cable segment in Minnesota, as well as on YouTube, hosted by Certified Reverse Mortgage Professional Beth Paterson of Reverse Mortgages SIDAC that is spreading the word about reverse mortgages to seniors and their adult children.

“It’s almost like a nest egg that’s going to grow even if you may not need the funds right now,” said Johnson, an academic who previously worked as a reverse mortgage originator in the Las Vegas area just prior to the housing crisis.

Johnson is also one of three co-authors of a paper titled “Retirement Trends, Current Monetary Policy, and the Reverse Mortgage Market,” which assess the current and future challenges facing retirees, and demonstrates how a reverse mortgage can be used to provide supplemental retirement income.

But he is not alone, as others in the financial planning community have also tackled the topic of the hidden value of the standby reverse mortgage line of credit in retirement planning, and how this feature can benefit borrowers as they prepare to fund their longevity.

“We need to start thinking about and planning what we’re going to do in the future, because most of us are going to outlive our assets and if we don’t have some alternative, it’s going to be much tougher when it occurs,” Johnson said in the Savvy Senior Sources segment.

While a reverse mortgage has the potential to help many retirees, a lack of education is still the biggest hindrance to greater utilization.

“There’s so much misinformation about reverse mortgages,” Johnson says. “People don’t realize how creative you can be; how many different ways you can use it; and how it makes sense to set it up now even though you may not need it now, because you can use it in the future.”

But what’s even tougher is getting people to change their opinions of reverse mortgages.

“You can’t force people to become educated,” he says. “You can provide different avenues for them to become educated, but it’s tough. If someone out there has a strong opinion that there’s something wrong about reverse mortgages it’s difficult to change their opinion.”

“If we can educate them, at least we’re making a start,” he says. “But we’ve got to find a way to trickle the message down to get more people to understand it.”

Written by Jason Oliva

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  • There is an old saying about wealth: “It is not what you make that counts but rather how much you keep.”

    As to the article, there is literally no such thing as a Standby Reverse Mortgage LOC. There is a Standby Reverse Mortgage Strategy (SRMS) and a HECM LOC that makes the SRMS even more appealing and useful with its principal limit growth feature.

    There is a distinct difference between a retirement plan and the funding of that plan. If funding can be improved through a strategy like the SRMS, then spending can be increased, the net estate left to heirs can be increased, or a combination of the two can be achieved, but without a feasible and prudent financial retirement plan, improving funding by itself may accomplish little. Just ask those seniors who got fixed rate Standards and did not know what to do with the unneeded proceeds they were required to take at closing.

    What is different today than four years ago when many seniors were carelessly originating fixed rate Standards with no feasible or prudent financial retirement plan in place to wisely invest those proceeds to mitigate exposure to negative arbitrage is FHA has generally made the fixed rate 2014 HECM less far beneficial to borrowers at closing than fixed rate Standards except perhaps in purchase transactions.

    We are now beginning to see borrowers who are seeking to refinance fixed rate Standards into adjustable rate 2014 HECMs. The stories are heart wrenching especially when they tell how originators encouraged them to get a fixed rate Standard when the borrowers admitted they did not know what was available to them even though counselors tried to discuss it with them. Today it is not clear if these borrowers can qualify for the 2014 adjustable rate HECM due to financial assessment, LESAs, and lower initial principal limits.

    In one case the senior has earned $7,000 before income tax on investments acquired with the excess proceeds gained at a fixed rate Standard close four years before and had $53,000 in accrued costs (each rounded to the nearest $1,000) on just the proceeds invested. The negative arbitrage (in this case $46,000 in four years) being seen is worse than losses several seniors incurred by investing into deferred annuities through their HECM originators over 10 years ago. Why origination of the pre-10/4/2010 fixed rate HECM and the fixed rate Standard was permitted to go on for such a long time is hard to say

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